Spain's 2010 Austerity Budget

September 30th, 2009

Spain’s Socialist government has unveiled tax increases designed to raise an extra €11bn ($16.2bn, £10.1bn) a year and cut a budget deficit swollen by the economic crisis. But it failed to convince opponents that the measures would be enough to rescue the public finances.

Before the summer, ministers insisted Spain did not need drastic tax increases. But on Saturday the cabinet bowed to the inevitable and approved what it called an “austerity” budget for 2010, outlining spending cuts and increases in income tax, value added tax and the tax on capital gains and interest income.

The budget prepared by Elena Salgado, finance minister, abolishes a €400 annual tax rebate granted only two years ago. That was near the end of a Spanish property driven economic boom that had allowed José Luis Rodríguez Zapatero, prime minister, to say even the left could reduce taxes.

From July next year – by which time the government hopes an economic recovery will have begun – the main VAT rate will rise two percentage points to 18 per cent, while a lower band for restaurants and hotels will rise one point to 8 per cent. The rate for basic food items will remain unchanged at 4 per cent.

The government has highlighted the new tax rates on unearned income – up 1 percentage point to 19 per cent, and up three points to 21 per cent for annual earnings above €6,000 – to suggest they are targeting the rich and not the middle classes.

“Those with the most should make the biggest contribution,” said Ms Salgado, who also announced a tax cut for small businesses that maintained or increased the number of their employees.

However, the unearned income tax rise is expected to bring in just €800m a year, less than a tenth of the budgeted extra revenue, and other political parties whose support the government needs to pass the budget were unimpressed.

Joan Ridao, of the leftist Catalan party Esquerra Republicana, called the budget “erratic, improvised and unrealistic”.

On the right, Mariano Rajoy, of the main opposition Popular party, said the budget was a recipe for more unemployment, more deficits and more taxes. “He [Zapatero] continues to lie to us, just as he did when he said there was no crisis,” Mr Rajoy said.

Story from Financial Times

See also Spain’s Salgado confident of budget approval

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